BoA Will Modify Both Its Firsts and Seconds

WASHINGTON-It has taken more than six months, but the Treasury Department has finally succeeded in getting a large bank servicer to modify the second liens it owns when the corresponding first mortgage is modified.

Last July, Treasury assistant secretary Herbert Allison told a congressional panel that six banks with large home equity loan portfolios had "pledged to solve the affordability of the second liens." At the time, it was estimated that four banks with $441 billion in second liens serviced 55% of all first mortgages.

Bank of America, which has a $150 billion home equity loan portfolio, is the first major servicer to sign up for Treasury's Second Lien Modification Program (2MP), which is a key important component of the Home Affordable Modification Program. Treasury officials are hoping other banks will follow. They plan to issue new guidelines for 2MP soon.

Under the agreement, BoA will reduce the monthly payments on qualifying home equity loans and lines of credit as part of the modification of a first. Bank of America will modify eligible second liens regardless of whether the first lien is serviced by BoA or another servicer, according to Barbara Desoer, president of Bank of America Home Loans.

"For many homeowners facing severe financial difficulty, decreasing the payment on the first mortgage without a reduction in the payment of the second lien may not produce an affordable combined mortgage payment," Ms. Desoer said. Last year, BoA charged off $7 billion in home equity loans and it ended the year with a 2.5% delinquency rate or $3.8 billion in nonperforming loans.

John Snyder, who manages foreclosure prevention programs for NeighborWorks America, considers it a positive sign that Bank of America has set the ball rolling. Second liens have always been a barrier to loss mitigation, he said. He expects Treasury will offer incentives for modifications that reduce the payments or principal amount of the second liens.

Last August, when the initial guidance for the 2MP program was issued, Treasury said it would make lump-sum payments to get banks to completely extinguish the second lien. It is unclear if that option is still on the table.

Mr. Snyder said he would like to see more writedowns of second mortgages or principal forbearance - where the principal is tacked onto the back end of the loan so the borrower doesn't have to pay interest. "Eliminating the monthly payments for the consumer is going to greatly facilitate the first-lien holder's ability to reduce the payments," the NeighborWorks manager said.